Cross River Crack-Up
A deteriorating business model, fraud, and banking crypto. What could possibly go wrong?
After the Great Bank Panic of March 2023, crypto firms had to scramble to find alternative banking solutions. In just two weeks, the crypto industry had lost three of the most crypto-friendly institutions in the business. Given the generally frosty attitude of regulators and bankers towards cryptocurrency, and the fact that crypto had now contributed to the failure of multiple banks, it is unsurprising that the prospects for now-bankless crypto firms were slim.
However, soon thereafter media reports surfaced about a possible savior. The stablecoin issuer Circle announced they would be using an obscure privately held New Jersey bank called Cross River to handle payment processing services.
Despite its relatively small size in asset terms, Cross River is a critical player in the financial technology “fintech” world. It also has a longstanding relationship with the cryptocurrency industry. Cross River has taken a somewhat unique approach to banking and has no branches and no tellers. Its focus on rapid growth and willingness to take risks launched it from a tiny bank worth a few million dollars to a multi billion- dollar valuation in a little over a decade.
While this approach has led to success, it has left Cross River tied (perhaps inextricably) to an industry on the brink of failure. At the same time, their focus on rapid growth over due diligence has opened up their bank to accusations of fraud. And despite the recent reports that Cross River will be the crypto world’s new home, it appears the company is actively distancing themselves from the industry.
Cross River grew rapidly by partnering with the fintech industry
Cross River was founded by the company’s current CEO Gilles Gade in 2008 after he and a group of investors bought a small New Jersey bank for about $10 million. After a couple years of minimal activity, in 2010 the firm partnered with the consumer lending “fintech” GreenSky to provide loan origination services.
Greensky specialized in no-interest loans for home improvement. In the post-2008 world of credit, there were few banks willing to take on the risk of making unsecured loans to consumers. However, where most other banks only saw risk, Cross River found opportunity. After this introduction to the fintech industry, Cross River subsequently partnered with a multitude of fintechs offering a variety of financing options to consumers.
In a 2019 Forbes article about the bank, Gade described the strategy this way:
“We’re in the moving business, not the storage business,” booms chief executive Gilles Gade, 53, an immigrant from France, balding and wearing clear-framed glasses and a navy Hugo Boss sweater. “We move assets. We originate [them], we package them, and we sell them.”
Most “fintechs,” despite the innovative-sounding name, are relatively simple: Fintechs specialize in making the kinds of loans that would typically not interest banks, like small consumer loans to buy individual products. Since these firms don’t have banking charters, they have to rely on outside partners to originate the loans. In most of these deals, Cross River originates the loans and then sells them to the fintech company. From there, the goal is to then sell the loans to third parties like hedge funds and pensions. In many cases, the loans were pooled and securitized.
It is worth keeping in mind that many of these loans are marketed as zero-interest buy now-pay later loans; if these are not paid on time, the interest rates skyrocket into the double digits. This has been criticized by many as a type of predatory lending that skirts individual state laws against usury. Cross River has been sued multiple times for predatory lending practices.
More critically, this model relies on a combination of robust consumer demand, downstream demand from other investors for debt, and low interest rates (to finance fintechs purchasing these loans). As interest rates rose, Cross River’s partners have had a harder and harder time selling the consumer loans to third parties. As the pipeline clogged and backed up, Cross River was left holding the bag. Over the last year, loans held for sale by Cross River more than doubled, from $1.1 billion to $2.3 billion. Individual consumer loans now make up 1/3 of Cross River’s total assets.
This is akin to a retailer having inventory building up on their balance sheet. It is a sign of a deteriorating business model, and as the “buy now, pay later” industry rapidly declines Cross River has been left holding the bag.
Cross River made a fortune from the Paycheck Protection Program… and also a lot of bad loans
After COVID-19 shut down the economy, the federal government stepped in to provide financial support to businesses in the form of forgivable loans to cover employment costs. Cross River saw another opportunity for rapid growth and partnered with several fintechs to mass-produce PPP loans.
Cross River’s PPP business was incredibly successful: By mid 2020, the bank was one of the largest originators of PPP loans:
Cross River has churned out loans to more than 106,000 businesses through the Paycheck Protection Program, a centerpiece of the government’s $2 trillion CARES Act. That puts it just behind three of the country’s most prolific lenders: Bank of America, JPMorgan Chase and Wells Fargo.
The tiny New Jersey bank ended up being the sixth-largest originator of PPP loans in the United States. This led to the bank generating over $1 billion in fees according to Bloomberg. However, the bank’s loan quality was more questionable. Cross River placed most of the burden for due diligence on their fintech partners, and a large proportion of loans turned out to be entirely fraudulent. One warning signs was the loan forgiveness rate: Cross River’s forgiveness rate trailed far behind most competitors, suggesting many applicants failed to meet the criteria for forgiveness.
By mid-2021, Cross River’s PPP loans were facing increasing scrutiny in the media. The initial reports of possible malfeasance were confirmed by a December 2022 report from the Small Business Administration. Notably, some 30% of federally-prosecuted PPP loan frauds were attributable to just two banks:
An investigation from the Project on Government Oversight found that Cross River Bank and Celtic Bank were involved in 30% of the Justice Department's fraudulent PPP loan prosecutions.
According to a May press release from the House subcommittee, Cross River Bank approved more than 280,000 PPP loans, worth over $6.5 billion, and Celtic Bank funded nearly 100,000 PPP loans, which totaled more than $2.5 billion.
In April 2020, Cross River's chief risk officer said in an email to staff: "There will be fraud rings going after these [PPP] funds." In October 2020, the CEO of Celtic Bank wrote in an email that the high level of fraud was "not surprising" because of the program's guidelines.
As a consequence, the SBA announced that it was launching a formal investigation of Cross River and several other banks:
In addition to the actions announced today, SBA launched a full investigation of the lenders -- Benworth, Capital Plus, Celtic Bank, Customers Bank, Cross River Bank, Fountainhead, Harvest, and Prestamos -- as well as the individuals and other related entities named in the report.
As a consequence, the SBA has refused to pay Cross River some $300 million in funds related to the PPP loans. It will be interesting to see how the SBA investigation turns out for Cross River Bank…
Cross River was all-in on crypto… until recently
In addition to its ostensibly technology-friendly attitude, Cross River has had a long association with cryptocurrency. Its early partnership with Coinbase started the relationship between the bank and the crypto industry:
“Crypto has been the darling of Cross River for eight years,” Gade told TechCrunch. “It started with our relationship with Coinbase as a loyal provider of banking integration, crypto to fiat and fiat to crypto onboarding for their customers.”
Cross River aggressively marketed its crypto-related services, including at one point offering loans backed by cryptocurrency collateral.
Cross River’s crypto-friendly attitude may have something to do with its venture capital backers. In 2016, the bank completed a successful VC funding round for $28 million led by Andreeson Horowitz (A16Z), Ribbit Capital and Battery Ventures. In subsequent rounds the bank raised a total of $908 million, with A16Z being a key investor throughout.
However, despite news reports suggesting Cross River remains committed to crypto, their recent actions suggest otherwise. The bank stopped offering crypto-backed loans in 2022, and we noted that the bank recently scrubbed most of the references to crypto off of their website:
Conclusion: Another troubled bank takes big risks… and now faces the consequences
While banks are generally expected to be conservative and risk-averse, the recent banking crisis has exposed some of the questionable practices in the industry. Banks like Signature and Silicon Valley took on the significant risks of holding large uninsured deposits that were likely to flee at the first sign of trouble. Both Silvergate and Signature chose to do business with problematic and potentially criminal customers, a decision that contributed to the failure of both institutions.
Cross River Bank embodies the “growth at all costs” ethos that dominates Silicon Valley. While this approach led to initial success, Cross River now finds itself embroiled in multiple legal battles and has been left holding the bag on a mountain of unwanted consumer debt.
The bank may have learned a lesson about the double-edged sword of risk and reward, as it appears they are abandoning the crypto industry in the face of widespread regulatory pressure and negative public perception. And if even Cross River Bank doesn’t want to do business with crypto companies anymore… who will?
I get it’s risky for banks but I do still feel surprised larger banks are averse to banking crypto companies - even for basic services. I’ve consulted with a few and always had to onboard them with small neo banks. I couldn’t even get them banked at Signature in 22. I always assumed since big banks could more easily absorb the risk they’d be less averse to taking on high risk clients. But no, the opposite is definitely the case.
PPP and all programs like it were, and are, a total fraud from the top down. Nothing but grift, theft, and wholesale, widespread international fraud on a scale larger than most could imagine. Absolutely sickening and a total affront to responsible savers and taxpayers.